Engine of Active ETF Creation: Latest Flight of Fixed Income Offerings

Amidst fixed income market volatility with the 30-year Treasury yield exceeding 5%, issuers are launching new bond ETFs with innovative strategies. Recent launches include the Astoria Dynamic Core U.S. Fixed Income ETF (AGGA), an actively managed "fund of funds" focusing on credit and duration, and the Regan Capital Fixed Rate MBS ETF (MBSX), defensively positioned due to the challenging rate environment. Additionally, the Aptus Deferred Income ETF (DEFR) employs options and swaps to minimize taxable distributions, appealing to investors seeking long-term capital appreciation, as active fixed income ETFs are on pace for another record year after seeing $200+ billion in net flows last year.

Analysis

The fixed income market is currently characterized by significant volatility and a shifting narrative, evidenced by the 30-year Treasury yield surpassing 5% and a persistently steep yield curve, even as equities have shown some recovery. In response to this environment, new actively managed fixed income ETFs are proliferating, seeking to offer investors nuanced strategies. Astoria Portfolio Advisors' Dynamic Core U.S. Fixed Income ETF (AGGA), which has attracted $32 million in net inflows, exemplifies this trend by employing a 'fund of funds' approach to dynamically adjust allocations across various fixed income sectors based on credit and duration interplay, charging a 0.56% expense ratio. Conversely, Regan Capital's new Fixed Rate MBS ETF (MBSX) enters a challenging climate for fixed-rate mortgage-backed securities, with the 10-year Treasury yield having risen over 20 basis points since the last FOMC meeting, potentially reducing refinancing and extending mortgage durations; consequently, MBSX is defensively positioned with 50% of its holdings in Treasury bills and carries a 0.4% expense ratio. Aptus's Deferred Income ETF (DEFR) offers a distinct, derivatives-based strategy using options and swaps to minimize taxable distributions and convert current income into long-term capital appreciation, albeit with a higher 0.79% expense ratio. These launches occur as active fixed income ETFs continue to gain traction, following over $200 billion in net flows last year and a strong start in the first five months of the current year, indicating robust investor demand for active management and innovative solutions in the bond market.

Key Decisions for Investors

• Investors navigating the volatile bond market and rising yields may consider actively managed ETFs like AGGA for dynamic exposure to various fixed income segments, leveraging professional expertise for tactical allocation.
• Given the challenging outlook for fixed-rate mortgage-backed securities due to rising interest rates, investors should exercise caution with products like MBSX, noting its current defensive positioning and the inherent prepayment risks in the MBS sector.
• For long-term investors focused on tax-efficient capital growth rather than immediate income, derivative-based strategies such as DEFR could be an option, provided they are comfortable with the complexity and higher expense ratio associated with such approaches.
• The significant and growing inflows into active fixed income ETFs suggest a broader market shift; therefore, evaluating the potential benefits of active management in navigating current fixed income complexities compared to passive strategies is merited.